Working Capital Management

Indraprastha Power Generation Co. Ltd.
(IPGCL)
SUMMER INTERNSHIP REPORT
INDRAPRASTHA POWER GENERATION CO. LTD., NEW DELHI

SUBMITTED BY:
BATCH: SS 07-09
NAME Phone No. E-Mail SECTION
Raja Kumar Choudhury 9971567809 MISSION
rajaku12@gmail.com
FN-3
To maximize generation from available capacity To plan & implement new generation capacity in Delhi Competitive pricing of our own generation To set ever so high standards of environment Protection. To develop competent human resources for managing the company with good standards. VISION TO MAKE DELHI POWER SURPLUS
ACKNOWLEDGEMENT
Working Capital Management 1
Indraprastha Power Generation Co. Ltd.(IPGCL)
The completion of any interdisciplinary project depends on co-operation, co-ordination and combined efforts of several sources of knowledge, energy and time. It is our serious endeavour to express our gratitude towards all those people who directly or indirectly contributed in successful completion of this project work. I had great pleasure in expressing my deep sense of gratitude to our project guide Mr. Prashant Vyas (Assistant Manager) of Finance Department for his remarkable help and suggestion in completing my training session. It is due to his encouragement and persistent motivation that I am able to compute this training. Finally, I am also thankful to Mr. V.P.Goel (Manager) of Finance Department & Mr. Panda and all those who have helped me in getting this project in its present shape.
To Whomsoever It May Concern
Working Capital Management
This is to certify that the project report entitled, which is being submitted by RAJA KUMAR CHOUDHURY a MBA student of IIPM has done a project under my guidance and supervision. The training is completed between the duration of 3rd April to 31st May,2008.The training has successfully completed for the academic year 2008-2009 which ensures the bona-fide work of the above mention candidate under the supervision of undersigned. The report is up to standard both in respects to its contents and its literary for being referred to the examiner. I wish him all the very best in his future endeavours.
UNDER GUIDANCE Mr. Prashant vyas Assistant manager Finance Department IPGCL/PPCL
INTRODUCTION
GLOBAL SCENARIO Power, the river of modern life...
Life depends on energy. Energy is a source that can neither be destroyed nor negated. It merely changes its form and shape. When captured, energy generates power. Since the discovery of fire, man, has constantly been on the run for more and more useful forms of energy. In todays times, the most commonly used and useful form of energy is power. Power is the driving force behind life in modern times. From generating light to electricity, power is the vital fluid that runs in the stream of our life. Unfortunately this river of the life often runs dry. Not because nature does not have enough energy to produce power. It runs dry due to mans negligence in handling and distributing energy. The power situation in Delhi till a few year ago was yet another example of mans incapacity to handle another form of energy. The Delhi Vidyut Board (DVB) was a State Electricity Board set up in 1997 under the Electricity (Supply) Act, 1948, succeeding the Delhi Electricity Supply Undertaking (DESU) which has existed since 1957 as a wing of the Municipal Corporation of Delhi. It was an integrated utility with generation, transmission and distribution functions serving all of Delhi except the NDMC and MES (Cantoment) areas to which it supplied power in bulk. The creation of DVB, replacing DESU, is 1997 proved to be merely a change in the legal status of the organization and was not followed by any real change in its structure, functioning and work culture. Its reputation continued to deteriorate and its poor commercial performance, the best known thing about DVB perhaps being its high Transmission and Distribution (T&D) losses made it a drain on the public exchequer. Further, failure in raising the resources necessary for improvement of its services made matters critical. There were unprecedented, widespread expressions of public discontent during the difficult summer of 1998.
In December 1998 when the present government came to power in Delhi, the power situation was grim to say the least. With T & D losses as high as 50% regular power cute for 10 to 15 hours and Delhi Vidyut board accumulating liabilities of over Rs. 23,000 crores, Delhi government had to come up with a fast and viable alternative. An alternative that would not only meet peoples aspirations in terms of its end result but also be interesting enough for
investors. And thus began a step by step process of a never-before fundamental power reform. Delhi Electricity Board Regulatory Commission (DERC) was constituted in May 1999 whose prime responsibility was to look into the entire gamut of existing activity and search for various ways of power sector reforms. The DERC is even today a fully functional body which has since issued tariff orders for annual revenue requirement. Delhi Electricity Reform Ordinance, 2000 was a body which was promulgated in October 2000 and notified in the form of an Act in March 2001. It mainly provides for the constitution of an Electricity Regulatory Commission, unbundling of DVB into separate generation, transmission and distribution companies and increasing avenues for participation of private sector. This was followed with a Tripartite Agreement which was signed by the government of Delhi, DVB employees to ensure the cooperation of stakeholders in this reform process. The tripartite agreement sent off very positive vibes to the people in general as well as to the investor community about the sincere and hassle-free objectives of power reforms. Next, a two stage competitive bidding process of Request for Qualification (RFQ) and Request for Proposal (RFP) was set into motion for privatization of the distribution companies. The bidders were selected on the basis of reduction of total Aggregate Technical and Commercial of losses (AT & C) a unique feature of the power sector reforms in Delhi. The bidders were required to bid on the basis of efficiency improvement like reduction of AT & C losses that they achieve year wise over a period of five years.
The Government of India on July 1, 2002, implemented the reforms by unbundling DVB into six companies, one holding company, one generation company (GENCO), one transmission company (TRANSCO) and three distribution companies (DISCOMS). The government handed over the management of the business of electricity distributions to there private companies since July 1, 2002 with 51% equity with the private sector.
For augmentation in generation capacity, the first gas turbine 140 MW of 330 MW Pragati Combind Cycle Gas based power project was put no commissioned operator in July 2002. It was the first power generating project in Delhi after a gap of 14 years. The second gas Turbine unit of 104 MW and waste heart recovery unit of 122 MW were operational by the end of December 2002 and may 2003. IPGCL (GENCO) generated 2940 MUs during the year 2002 against the target of 2940 MU s fixed by Center Electricity Authority. The expected generation for 2002-2003 is 2960 MUs. Fly ash brick plant near IP Station is being installed which has started manufacturing 3.00 lakhs ash bricks per day from March 01,2003. Two mini fly ash plants at Rajghat power Station are expected to double their production from 32,000 bricks per day to 64,000 bricks per day. This will not utilised the fly-ash but will be envolment friendly also. As a result of the power sector reforms in Delhi, the National Capital is now being served by two of the best electric utilities in India, BSES and TATA Power. They will take some time to achieve desired objectives. However, one things is certain. With economic viability the power situation in Delhi will only get better with every passing year, thus reversing the legacy of deteriorating service that we had seen in past.
THE INDIAN POWER SECTOR

Generation of electricity in Delhi started with a 2 MW diesel set in 1903. After independence Rajghat Power House A was installed in 1951 with 5 MW capacity. Delhi Electric Supply Undertaking (DESU) came into existence In 1958 and two Units of 9.6 MW capacity each were installed as Rajghat Power House B. In the second five year plan, three diesel
generating sets totaling 20 MW were installed at different locations in Delhi. As a first major step towards making Delhi self sufficient in power, first unit of 36.6 MW was installed in 1963 at Indraprastha Power Station. A 15 mw unit was installed at Rajghat in 1966 followed by three units of 67.5MW each in 1967-68 at Indraprastha Power Station. Delhi Electric Supply Undertaking was restructured and Delhi Vidyut Board was formed in 1997. Indraprastha Power Generation Co. Ltd. came into existence on 1st July, 2002 after unbundling of Delhi Vidyut Board into six entities. The main function of IPGCL is generation of electricity with an installed capacity of 994.5 MW and 2750 MW capacity addition in pipeline.
SNAPSHOTS OF THE DELHI POWER SUPPLY
PRESENT INDIAN SCENARIO
The Power demand in the Capital City is increasing with the growth of population as well as living standard and commercialization. The unrestricted power demand in the summer of year 2000 was 3000 MW and increasing every year @ 6 to 7%. In 2005-2006, it is expected to be 4078 MW and by 2009-10 it will reach 5075 MW.
Erstwhile DVB's own generation from RPH, I.P. Station and Gas Turbine Power Station had been around 350-400 MW and Badarpur has been supplying 600-700 MW and the balance was met from the Northern Grid and other sources.
To bridge the gap between demand and supply and to give reliable supply to the Capital City, Delhi Govt. had set up 330 MW Pragati Power Project on fast track basis. To cut down the project cycle duration, turnkey contract was awarded to M/s BHEL in May 2000 based on similar project executed by BHEL at Kayamkulam (owned by NTPC). To further ensure reliable and smooth operation of the plant, experience of NTPC was utilized by retaining them as engineering consultant and specification of the Kayamkulam Project were adopted.

Indraprastha Power Generation Co. Ltd. (IPGCL) Pragati Power Corporation Ltd. (PPCL)
OBJECTIVES OF THE COMPANY

A Main Objectives as per Memorandum of Association of Indraprastha Power
Generation Company Limited (IPGCL) is:
To acquire, establish, develop, construct, erect, lay, operate, run, maintain, enlarge, alter, renovate, modernize, work and use in the National Capital Territory of Delhi and elsewhere Electric Generating Stations, projects associated lines and all things connected thereto including power stations, distribution centres, cables, wires, lines, accumulators, plant, motors meters, apparatus, materials and things connected with the production, generation, use, storage, measurement, transmission, supply and distribution of the power. To carry on the business of purchasing, importing, exporting, producing, trading, manufacturing including finalization of tariff. Billing and collection or of otherwise dealing in electric power and to coordinate, aid and advise on the activities of other generation of power, on all matters concerning the operation and maintenance of electric measurement, supply and distribution of power. To study, investigate, collect information and data, review operations, plan, research, design, prepare feasibility reports, prepare project report, diagnose operational difficulties and weaknesses and advise on the remedial facilities and to undertake for and on behalf of others the setting up of electric power plants and generally work for the efficient and economic management of electric power and the optimum utilization of the resources available.
Indraprastha Power Generation Co. Limited : a brief history & background

The Indraprastha Power Generation Company Limited (IPGCL) has three (3) plants as detailed below;
Indraprastha Power Station (IP) with a total capacity of 247.5 MW with three units of 62.5 MW each and one unit of 60 MW capacity using coal as fuel. Rajghat Power House (RPH) with a total capacity of 135 MW with two units of 67.5 MW each using coal as fuel. Gas Turbine Power Station (GTPS) with a total capacity of 282 MW having six gas turbines of 30 MW each using CNG/LNG as fuel and three steam turbines of 34 MW each.
BRIEF PROFILE OF THE COMPANY Indraprastha Power Generation Co. Ltd. (IPGCL) was incorporated on 1st July,2002 and it took over the generation activities w.e.f. 1st July,2002 from erstwhile Delhi Vidyut Board after its unbundling into six successor companies. The main functions of IPGCL is generation of electricity and its total installed capacity is 994.5 MW including of Pragati Power Station. Its associate Company is Pragati Power Corporation Limited which was incorporated on 9th January, 2001. Indraprastha Power Station First Unit of 36.6 MW at I.P. Station was commissioned in 1963 and was inaugurated by the first Prime Minister of India, late Pt. Jawaharlal Nehru. The Power Station was further expanded in 1967-68 with installation of three Units of 62.5 MW each; in 1971 one more Unit of 60 MW was commissioned. The first Unit of 36.6 MW retired by CEA in Feb.2000 and is under disposal. The present available capacity of this Station is 247.5 MW. It is a coalbased station, getting deshaled coal having ash content less than 34% from NCL, Bina.
Rajghat Power House Two Units of 67.5 MW were installed in 1989-90 at Rajghat power House as replacement of old units. The present generation capacity of this Station is 135 MW like I.P. Station. RPH is also coal based operating on deshaled coal from NCL, Bina.
Gas Turbine Power Station Six Gas Turbine Units of 30 MW each were commissioned in 1985-86 to cater to the power demand in peak hours. Initially this Station worked as peaking power station but due to growing power demand, it was converted into combined cycle gas turbine station with commissioning of Waste Heat Recovery Units in 1995-96. The total capacity of this Station is 282 MW. The gas supply has been tied up with GAIL through HBJ Pipeline. The APM gas
allocation is not sufficient for full generation from the power station. Subsequently, with the availability of Regassified LNG, an agreement was made with GAIL for supply of R-LNG so that maximum generation could be achieved.
Pragati Power Station To bridge the gap between demand and supply and to give reliable supply to the capital City a 330 MW combined cycle Gas Turbine Power Project was set up on fast track basis. This plant consists of two gas based Units of 104 MW each and one Waste heat Recovery Unit of 122 MW. Gas supply has been tied up with GAIL through HBJ Pipeline. Due to paucity of water this plant was designed to operate on treated sewage water which is being supplied from Sen nursing Home and Delhi Gate Sewage Treatment plants.
WORKING CAPITAL MANAGEMENT

Every business enterprise requires working capital to pay-off its short term obligations. Moreover, every firm needs working capital because of the fact that its production, sales, cash payment and realisation are not instantaneous and synchronised. There elapses certain time for converting raw materials into finished goods; finished goods into sales and finally
realisation of sale proceeds. Hence funds are required to support these activities in the firm. A number of terms like working funds, circulating capital, temporary funds, are also used synonymously for working capital. However the expression Working Capital is preferred by many due to its popularity and simplicity. There are two concepts of working capital-gross and net. Gross working capital refers to the firms investment in current assets. Current assets are the assets which can be converted into cash within an accounting year (or operating cycle) and include cash, short term securities, debtors, (accounts receivable or book debts) bills receivable and stock (inventory). Net working capital refers to the difference between current assets and current liabilities. Current liabilities are those claims of outsiders which are expected to mature for payment within an accounting year and include creditors (accounts payable), bills payable, and outstanding expenses. Net working capital can be positive or negative. A positive net working capital will arise when current assets exceed current liabilities. A negative net working capital occurs when current liabilities are in excess of current assets. The two concepts of working capital gross and net - are not exclusive; rather they have equal significance from the management viewpoint. The gross working capital concept focuses attention on two aspects of current assets management: (a) How to optimise investment in current assets? (b) How should current assets be financed?
The consideration of the level of investment in current assets should avoid two danger points excessive and inadequate investment in current assets. Too much of working capital reduces the capital turnover ratio and lowers the overall return on total investment. Similarly, too small an amount of working capital, though cuts into the required level of liquidity initially, helps yield higher rate of return on total capital employed. Thus, one can observe certain trade off existing between the two basic, yet opposing
objectives of working capital, namely liquidity and profitability; in the sense that high liquidity and low profitability & high profitability and low liquidity are consistent. But high liquidity and high profitability are quite inconsistent with each other. It is the endeavour of all corporate managements to see that proper balance is struck between liquidity and profitability in the management of working capital. Another aspect of gross working capital points to the need of arranging funds to finance current assets. Whenever a need for working capital funds arises due to the increasing level of business activity or for any other reason, financing arrangement should be made quickly. Similarly, if suddenly, some surplus funds arise they should not be allowed to remain idle, but should be invested in short- term securities. Thus, the finance manager should have knowledge of the sources of working capital funds as well as investment avenues where idle funds may be temporarily invested. Net working capital is a qualitative concept. It indicates the liquidity position of the firm and suggests the extent to which working capital needs may be financed by permanent sources of funds. Current assets should be sufficiently in excess of current liabilities to constitute a margin or buffer for maturing obligations within the ordinary operating cycle of a business. In order to protect their interests, short term creditors always like a company to maintain current assets at a higher level than current liabilities. It is a conventional rule to maintain the level of current assets twice the level of current liabilities. However, the quality of current assets should be considered in determining the level of current assets vis--vis current liabilities. A weak liquidity position poses a threat to the solvency of the company and makes it unsafe and unsound. A negative working capital means a negative liquidity, and may prove to be harmful for the companys reputation. Excessive liquidity is also bad. It may be due to mismanagement of current assets. Therefore, prompt and timely action should be taken by management to improve and correct the imbalances in the liquidity position of the firm. Net working capital also covers the question of judicious mix of long-term and short-term funds for financing current assets. For every firm, there is a minimum amount of net working capital which is permanent. Therefore, a portion of the working capital should be financed with the permanent sources of funds such as equity share capital, debentures, long-term debt, preference share capital or retained earnings. Management must therefore decide the extent to which current assets should be financed with equity capital and /or borrowed capital.
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In summary, it may be emphasised that both gross and net concepts of working capital are equally important for the efficient management of working capital. There is no precise way to determine the exact amount of gross or net working capital for any firm. The date and problems of each company should be analysed to determine the amount of working capital. There is no specific rule as to how current assets should be financed. It is not feasible in practice to finance current assets by short term assets only. Keeping in view the constraints of the individual company, a judicious mix of long and short term finances should be invested in current assets. Since current assets involve cost of funds, they should be put to productive use.
Structure of Working Capital For the proper appreciation of the problems of working capital management, a closer look at the individual items of working capital is essential. The following are the frequently noted constituent parts of working capital. I Current Assets Inventories
Raw materials Work-in-progress Finished goods Stores and spares Miscellaneous goods Receivables Trade debtors Loans and Advances Other debtor balances Marketable Securities Government securities Semi-government securities Shares, debentures, etc. Cash and Bank Balances Cash in hand Cash at bank Cash in transit
II Current Liabilities Sundry creditors Interest accrued on loans Advances received from customers Short term loans from banks Trade dues and other liabilities Securities and other deposits
Deposits from public, etc. Current provisions for: Taxation Dividends Bonus Contingencies CHARACTERISTICS OF CURRENT ASSETS In the management of working capital, two characteristics of current assets must be borne in mind (i) short life span, and (ii) swift transformation into other asset forms. Current assets have a short life span. Cash balances may be held idle for a weak or two, accounts receivable may have a life span of 30 to 120 days, and inventories may be held for 30 to 100 days. The life span of current assets depends upon the time required in the activities of procurement, production sales, and collection and the degree of synchronisation among them. Each current asset is swiftly transformed into other asset forms: cash is used for acquiring raw materials: raw materials are transformed into finished goods (this transformation may involve several stages of work-in-process); finished goods generally sold on credit, are converted into accounts receivable (book debt); and finally accounts receivable, on realisation, generate cash. Figure 1 on the next page shows the cycle of transformation. The short life span of working capital components and their swift transformation from one form into another has certain implication.
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Finished Goods Accounts Receivable s Wages, Salaries, Factory Overheads Raw Materials Work in Process
Cash
Supplier s
Figure 1: Current Assets Transformation Cycle
CURRENT ASSET CYCLE Decisions relating to working capital management are repetitive and frequent. The difference between profit and present value is significant. The close interaction among working capital components implies that efficient management of one component cannot be undertaken without simultaneous consideration of other components. For example, if the firms has a large
accumulation of finished goods inventory, it may have to provide more liberal credit terms or show laxity in credit collection. Another example: if the firm has a cash crunch it may have to offer generous discounts. NEED FOR WORKING CAPITAL A company with sufficient working capital is always in a position to take advantage of any favourable opportunity either to purchase raw materials or to execute a special order or to wait for better market position. Further the adequacy of working capital contributes a lot in raising the credit standing of a corporation because of better credit terms, reduced cost of production on account of the receipt of cash discounts, favourable rates of interest on bank loans, etc. the ability to meet all reasonable demands for cash without inordinate delay is a great psychological factor to improve all-round efficiency of business and to create self confidence in persons at the helm of affairs of the company. A firms profitability may be increased as more working capital is added to the fixed capital, provided the firm does not exceed 100 percent capacity.
DETERMINANTS OF WORKING CAPITAL There are no set rules or formulae to determine the working capital requirements of firms. A large number of factors, each having a different importance, influence working capital needs of firms. Also, the importance of factors changes for a firm over time. Therefore, an analysis of relevant factors should be made in order to determine total investment in working capital. The following are the factors which generally influence the working capital requirements of firms: 1. Nature of business 2. Manufacturing cycle 3. Production policies 4. Terms of purchase and sale 5. Miscellaneous
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Nature of Business A companys working capital requirements are directly related to the type of business it operates. In some industries like public utility services the consumers are generally asked to make payments in advance and the money thus received is used for meeting the requirements of current assets. Such industries can carry on their business with comparatively less working capital. On the contrary, industries like cotton, jute may have to be required to purchase raw materials for the whole of the year only during the harvesting season, which obviously increases the working capital needs in that period. Manufacturing Cycle It is said that the longer the manufacturing cycle of a product the greater its cost, and the larger is the requirement of working capital. The reason is that a larger amount of inventory is tied up in its manufacture. Also the higher the rate of turnover of inventories the larger is the volume of business which can be transacted with a given amount of circulating assets. Besides, the range of product influences the requirements of working capital. Production Policies Depending upon the kind of item manufactured by adjusting its production schedules a company may be able to off-set the effects of seasonal fluctuations upon working capital. The choice rests between varying output in order to adjust inventories to seasonal requirements and maintaining a steady rate of production and permitting stocks of inventories to build up during off-season period. In the first instance, inventories are kept to minimum level; in the second, the uniform manufacturing rate avoids high fluctuations of production schedules but enlarged inventory stocks create special risks and costs. Terms of Purchase and Sales. The magnitude of working capital of a business is also affected by the terms of purchase and sales. If , for instance , an undertaking purchase its materials on credit basis and sells its finished goods on cash basis, it requires less working capital over an undertaking which is following the other way of purchasing on cash basis , and selling on credit basis. It all
depends on the managements discretion to set credit terms in consideration with the prevailing market conditions. Miscellaneous Apart from the above mentioned factors some others like the operating efficiency, profit levels, managements policies towards dividends, depreciation and other reserves, price level changes, market conditions, shifts in demand for products competitive conditions, conditions of supply, vagaries in supply of raw materials, import policy of the government, hazards and contingencies in the nature of business, etc. also determine the amount of working capital required by an undertaking.
SOURCES OF WORKING CAPITAL FINANCE An enterprise generally requires two kinds of working capital, namely, fixed working capital and variable working capital. Though working capital increases and decreases overtime, there is always a minimum level of current assets which is continuously required by the firm to carry on its business operations. This minimum level of current assets is referred to as permanent or fixed working capital. It is permanent in the same way as the firms fixed assets are. Depending upon the changes in production and sales, the need for working capital will fluctuate. For example, extra inventory of finished goods will have to be maintained to support the peak periods of sales and investment in receivables may also increase during such periods. On the other hand, the extra working capital, needed to support the changing production and sales activities, is called variable or temporary working capital. However, both the kind of working capital is necessary to facilitate production and sales. Viewed thus, the sources of working capital can also be broadly classified into the following two categories: 1. Permanent sources of working capital ; and 2. Current sources of working capital.
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Permanent Sources of Working Capital The permanent sources of working capital can be both internal and external. Among the internal sources, retained earnings represent the undistributed profits and are considerably dependent upon factors like the rate of company taxation and the dividend policy. Generally, this source is used for financing expansion but can also be used for financing working capital, depending upon how much is available. The availability of retained earnings depends upon the operative stage of the enterprise in addition to the price policy and the method of appropriation of profit. As regards depreciation, it is a part of the cost of production and is subsequently recovered in cash and gross revenue. Where the life of the plant and machinery is fairly long, depreciation can be utilised as a long-term source of working capital. Retained earnings and depreciation may prove to be the best sources of permanent working capital, but they are not available for initial stages of an enterprise. Unless an enterprise has operated for a sufficiently long time, there share in the working capital is not likely to be much. Further, in the case of public undertakings, the discretion about the use and accumulation of these funds may not be exclusively with the enterprise and reliance on them is therefore, is conditional and subject to the approval of the government. In case, retained earnings and depreciation are inadequate or are disallowed by the government, public enterprises may be required to resort to external sources to finance permanent working capital needs. Among the external sources, the government in general, will be the only source which a public undertaking can tap. The government may advance loans or may grant cash subsidies. Current Sources of Working Capital Finance The current sources of working capital finance may also be internal and external. Among the internal sources, a reference may be made to the tax provisions and unpaid dividends. Taxes are payable at stated intervals subsequent to the receipt of the income on which they are assessed. The enterprise has, therefore, a chance of using funds kept under tax provisions during the intervals. Similarly, payment of dividends may be timed so as to suit the requirements of working capital, particularly when they are enhanced by seasonal factors.
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It is noticeable that provisions of tax and unpaid dividends can be used as sources of current working capital but occasionally and that too with the limitations in regard to their general inflexibility and in the initial stages of operation of their non-availability. Thus, undoubtedly, public enterprises have to mobilise other external sources of current working capital finance. The lone and dependable source is the arrangement of cash credit facilities with banks. Trade credit may also be looked into as a source. Generally, banks advance both secured and unsecured loans. Usually, a credit line is agreed upon, implying that there exists an informal undertaking between the borrower and the bank as to the maximum credit which the bank will provide the borrower at any time. In conclusion, it can be said that both the permanent and current sources of financing working capital are important, though it is difficult to say anything categorically about the relative importance. In principle, it is agreeable that the permanent working capital should be financed from out of permanent sources, while the current working capital should be financed out of current sources. But in practice, particularly, for the public sector undertakings, this may not be followed rigidly due to the restricted choice of sources of finance and the large quantum of funds required.
WORKING CAPITAL MANAGEMENT AT IPGCL In the context of the need for efficient management of working capital , some of the crucial aspects of working capital are been analysed in this section, namely, size, growth, structure and efficiency with respect to IPGCL. Size and Growth of Current Assets Table 1 presents the information on size of current assets and its percentage to total assets in IPGCL.It can be seen from the table that current assets in absolute terms is at Rs. 379.76 Crores in 2007-2008 and at Rs. 435.00 Crores in 2004-2005. In relatives, current assets which averaged around 32.93% in the beginning of the study decreased to 32.28% at the end of the study period. One of the implications of the study of the size of the current assets is that the ratio of current assets to total assets provides a measure of the relative liquidity of the firms asset structure. The higher the ratio, the lower would be the profitability and risk. In the sense, that higher
investment in current assets not only locks up the funds that can be gainfully employed elsewhere, but also necessitates the firm to incur additional costs in the maintenance of such high volume of current assets.
20042005 Current Assets (Rs. Cr.) Progressive Percentage Growth of Current Assets Total Assets (Rs. Cr.) 100 1320.81 435.00
20062007 386.27
2007-2008
379.76
88.79 1220.83 31.63 834.56 94.21
87.30 1176.23 32.28 796.47 89.91
Current Assets as percentage of Total Assets (in %) 32.93 Fixed Assets (Rs. Cr.) Progressive Percentage Growth of Fixed Assets 885.81 100
Table 1: Size and Growth of Current Assets Another aspect of working capital in IPGCL is that there is a significant decrease in the growth of the total currents even lower than that of fixed assets. Table 1 shows the decline in growth of current assets and fixed assets respectively. The juxtaposition of the information contained in this table makes it apparent that the working capital recorded an increase of around 93% during the period under study; whereas the investment in fixed assets has fallen to 90%.
Structure of Working Capital It is evident from the foregoing analysis that current assets in IPGCL consisting of inventories, sundry debtors, cash and bank balances, other current assets and loans & advances constitute a significant part of the total capital employed by the public sector undertaking.
The composition of the current assets and the relative importance of the ingredients is presented in Table 2 on the next page. It can be seen from the table that the structure of current assets is dominated by cash and balances in IPGCL. It varied between the lowest of 75.26% of the current assets in 2006-07 and the highest of 80.97 in 2005-06. Particulars Inventories 2004-2005 38.85 (8.93) Sundry Debtors 11.29 (2.60) Cash and Bank Balances Other Current Assets Loans and Advances TOTAL 343.61 (78.99) 4.54 (1.04) 36.69 (8.43) 434.98 2005-2006 38.94 (10.08) 12.25 (3.17) 312.74 (80.97) 2.71 (0.70) 19.61 (5.08) 386.25 2006-2007 29.36 (7.73) 37.57 (9.89) 285.80 (75.26) 5.31 (1.40) 21.71 (5.72) 379.75
Figures in brackets are in percentage of Total Current Assets Table 2: Structure of Working Capital Management
INVENTORY MANAGEMENT
Inventory represents an important segment of the total assets of most enterprises. It is vital that it should be managed efficiently. In the field of working capital, efficient management of inventory poses a challenging problem to the public sector enterprises particularly in India in the absence of any guiding principles from the government in this regard. The lack of conscious efforts by public enterprises to control the growth of their inventory volume and the diversity in the field of public industrial activities has added to the complexity of the problem all the more. Thus it would be very relevant to throw light upon the structure of
inventory of IPGCL in order to point out the degree of efficiency with which their funds are utilised in this major component of working capital. Inventories are important to the management of an enterprise primarily because of the direct impact which they have upon profits. Profit is affected by inventory in several ways. First, too much or too little inventory affects the return on investment. Secondly, the rate at which inventories move through the production and distribution process also affects the cost of doing business. For any volume of sales the amount of working capital required for efficient operation is less when inventory turnover is higher than when it is low. The primary objectives of inventory management are (a) to minimise the possibility of disruption in the production schedule of a firm for want of raw materials, stores and spares, and (b) to keep down capital investment in inventories. Although it is essential to have necessary inventories, excessive inventory is idle resource of an enterprise. Inventory management, therefore, should strike a balance between too much inventory and too little inventory. It is absolutely imperative to manage inventories efficiently and effectively in order to avoid unnecessary investments in them. An undertaking neglecting the management of its inventories will be jeopardising its long run profitability and may even fail ultimately.
Both the excessive and inadequate investment in inventories affects the profitability of the enterprise. Excessive investment in inventory results in high inventory carrying costs such as additional storage space, stores handling costs, stores losses, insurance and other carrying costs. Besides, the firm also has to incur Opportunity Cost on the excessive made in inventories. On the other hand, inadequate investment in inventories is still more dangerous. Insufficiency of inventory leads to frequent production hold-ups and failure to meet delivery commitments to customers. As such the objective of inventory management can be spelt out as the evidence of excessive and inadequate investment in inventory as an essential step to improve profitability.
Efforts should be made to place an order at the right time with the right sources to acquire the right quantity at the right price and quality. The literal meaning of the word inventory is stock of goods. It designates the aggregate of those items of tangible property share which (a) are held for sale in the ordinary course of business, (b) are in the process of production for sale or (c) are to be currently consumed in the production of goods or services to be available for sale. Inventory consists of stocks of stores, and spares, stationery and printing, tools, raw materials, stock in trade, semi-finished goods, finished goods, by- products, work-inprogress, store in transit, implements, jigs and fixtures and miscellaneous goods. In case of IPGCL, the inventory had only one component-that is, stores and spares. So total inventory consists of only the amount invested in stores and spares.
Size of Inventory Table 3 on the next page gives the size of inventory of IPGCL and the progressive base year percentage growth of inventory from 2004-05 to 2006-07. Table 3 indicates that the size of inventory in IPGCL for the period under study has a decreasing trend. It can be seen from the table that inventories carried by IPGCL were 29.36 crores in 2006-07 as against 38.85 crores in 2004-05. During the study period it decreased by around 24% as compared to the base year (2004-05). Table 3 shows the ratio of inventory to current assets in IPGCL for the period covered under study. It is 7.73 in 2006-07 as against 8.93 in 2004-05, which is the second highest during the study period. The figure for this ratio shows a fluctuating trend.
Table 3 also shows the ratio of inventory to total assets for the period under study. The table shows that in IPGCL the inventory is 2.49 per cent of total current assets in 2006-07 as compared to 2.94 per cent in 2004-05. It has a fluctuating trend. It was highest in 2003-04 which is 3.18 percent and lowest in 2006-07. Till 2005-06 it has an increasing trend where it was 3.18 per cent. After this it has a decreasing trend up to 2006-07 (2.49 per cent). Table 3 shows the ratio of inventory to (net) working capital of IPGCL. The net working capital of IPGCL is positive throughout the period under study. The ratio stands at 0.09 in 2006-07 as against 0.12 in 2004-05 with minor fluctuations.
Particulars
2004-2005
2005-2006 38.94
2006-2007 29.36
Total Inventory 38.85 (Rs. Cr) Progressive Base 100.00 Year percentage Growth Ratio of 8.93 Inventory to Total Current Assets (in %)
100.23
75.57
10.08
7.73
28
Ratio of 2.94 Inventory to Total Assets (in %) Ratio of 0.12 Inventory to Net WC* Ratio Inventory Capital Employed of 0.032 to
3.18
2.49
0.12
0.09
0.033
0.026
*WC refers to Working Capital Table 3: Size of Inventory Table 3 shows the ratio of inventory to the capital employed in IPGCL. The table shows that in IPGCL the ratio of inventory to capital employed is 0.026 in 2006-07 as against 0.032 in 2004-05. In comparison to the base year(2004-05) it has an overall increasing trend with one major fluctuation in the year 2005-06 in which the ratio stepped up to 0.033 and then levelling down to a modest 0.026 in 2006-07.
Total Output and Total Revenue Relationship The progressive base year percentage growth in total output and total revenue in IPGCL has also been calculated and shown in Table 4. Particulars 2004-2005 2005-2006 407.21 2006-2007 373.05
Operating 399.00 Expenses (Rs. Cr) Progressive 100 Base year percentage Growth in Operating Expenses
102.05
93.49
29
Operating 487.00 Revenue (Rs. Cr) Progressive 100 Base year percentage Growth in Operating Revenue
478.38
510.95
98.22
104.9
Table 4: Progressive Base Year percentage Growth in Total Operating Cost and Operating Revenue Table 4 shows the progressive base year percentage growth in total output (equivalent to operating expenses) and total revenue (equivalent to operating expenses) in IPGCL for the period under study. It shows that the steady fall in the size of total inventory during the study period 2004-05 to 2006-07 has taken place due to a controlled increase in total output and total revenue of IPGCL.
This shows that the management of IPGCL has controlled the inventory efficiently. Ordinarily the trend throughout for both the parameters is progressive. Operating revenue shows an increase of around 4.9 per cent and operating expense decrease of around 6.5 per cent over that of the base year 2004-05. To conclude, the size of inventory pin-points two important facts: first, the concept of optimum inventory is been followed by IPGCL. The progressive base year percentage growth in total inventory, total output, and total revenue makes it very clear that more often the total inventory has decreased as against the increase in the other two variables. Secondly, in their effort to optimize the size of inventory, IPGCL has laid full emphasis on the absolute reduction of the inventory volume itself.
Adequacy of Inventory
Study of the size of inventory does not disclose that whether the size of inventory maintained by IPGCL has been adequate, excessive or short in relation to its inventory requirements. While it is difficult to lay down a single standard to assess in precise terms the adequacy or otherwise of the inventory, there are still some ratio tests which provide a good insight into the extent of over-stocking or under-stocking. A common determinant is the value of inventory expressed into months cost or value of production. The ratio between inventory and cost of production shows the extent of money locked up in inventories. It locates the extent of over-stocking in inventory in terms of cost of production. Multiplied with the number of months in a year, it discloses the factor of how many months production needs are invested in inventory. Through this one can easily identify whether a firm is carrying any excess inventory by comparing the results with industry averages or with similar industries in advanced countries.
Particulars Operating Costs (Rs. Cr)
2004-2005 399.00
2005-2006 407.21
2006-2007 373.05
Operating 487.00 Revenue (Rs. Cr)
478.38
510.95
Total Inventory 38.85 (Rs. Cr) Inventory Turnover Ratio 12.53
38.94
29.36
12.28
17.40
31
Table 5: Adequacy of Inventory Inventory Turnover A more refined and important criterion for measuring the soundness and adequacy of the inventory is the ratio between sales and inventory, i.e, inventory turnover ratio. Excess investment in inventory results in its low turnover, while rapid turnover high productivity of inventory items. In case of INDIAN the inventory turnover ratio has been calculated by dividing the operating revenue by the inventory. This ratio may be expressed as follows: Operating Revenue Inventory turnover = Inventory
Table 5 on the previous page shows the ratio of inventory turnover of IPGCL for the period of three years covered by the study. The table shows IPGCL has a good picture of inventory turnover ratio. The ratio is 17.40 times in 2006-07 as compared to 12.53 in 2004-05 revealing a steady rise. It shows efficiency of inventory management but the operating revenue also continuously increased.
Evaluation of Inventory Management There is no single measure that can be used to test the overall effectiveness with which inventory is been managed. An overall measure of the effectiveness of inventory policies may be obtained by calculation of the turnover of inventory. This is a very broad measure. More precise evaluation of the management of inventory is achieved by relating the process of evaluation to the objectives of inventory management. Among the more important objectives are the control of stock-outs, obsolescence and spoilage, and inventory costs. If these costs are deemed important to control, the accounting system or other records must be designed to show success in affecting these aspects of inventory management.
CASH MANAGEMENT
Cash management is concerned with making use of cash resources in such a way that maximises a firms profit without endangering its liquidity position on credit standing in the market. It regards cash as an asset similar to other assets which must ensure a reasonable return. Holding idle cash involves an opportunity cost. Cash management aims at reconciling the maintenance of liquidity with the maximisation of profitability. A sound cash management programme requires that holding of cash should be kept at the minimum and every unit of money should be used or invested so as to maximise profit. It regards excessive cash holding as a symptom of managerial inefficiency and pays attention to improving collection of receivables, controlling payments of invoices and investment of short term cash surpluses profitably. There is however, no easy formula available to determine the amount of cash which a firm should carry. On the other hand, carrying cash is expensive, since it is a non-earning asset. A firm having any cash beyond its minimum requirements lowers its earnings. Size of Cash
The size of cash balance of a firm is affected by various factors such as the nature of its business, the size of business, the credit position of the firm and the status of its receivables and inventory accounts. These factors would force a firm to carry higher or lower level of cash balances. So adequate supply of cash to meet the need of the business is essential. In IPGCL cash balances include the total size of cash and bank balance under current assets.
Particulars Cash and Bank Balances
2004-2005 343.61
2005-2006 312.74
2006-2007 285.80
Trend 100 percentage of Cash & Bank Balances Operating 487.00 Revenue (Rs. Cr) Trend percentage Operating Revenue 100 of
91.01
83.17
478.38
510.95
98.22
104.9
Table 6: Size of Cash & Bank Balances at IPGCL

Table 6 shows the size of cash and the value of the total operating revenue of IPGCL for the period of three years covered by the present study. The table shows a fluctuating trend in the cash and bank balances of IPGCL with a highest of Rs. 343.61crores in 2004-05 and a lowest of Rs. 285.80 in 2006-07. The total cash decreased by 83.17 per cent whereas the total operating revenue increased by around 105 per cent during the period under study.
Liquidity Ratios of IPGCL To test the liquidity of IPGCL, the following ratios have been used: 1. Current Ratios 2. Quick Ratios Current Ratio Current ratio is the most widely used measure of liquid position of a concern. This ratio shows the relationship between current assets and current liabilities. Current ratio is applied to test solvency as well as short term financial strength of a company to meet its current obligations with a margin of safety. Traditionally a 2:1 current ratio is taken as a satisfactory standard for the purpose. Table 7 on the next page shows the current ratio of IPGCL for the period of three years covered by the present study. The highest is 5.97 in 2005-06.
Quick Ratio The measurement of comparative liquidity of current assets can be further refined through the use of quick ratio. This test is also known as acid-test ratio. The acid- test ratio is computed
by dividing current assets other than inventories by current liabilities. The omission of inventories from the acid test ratio is based on the belief that they are the least liquid components of the current assets group. Another reason for the exclusion of inventories is the belief, quite often warranted that the valuation of inventories normally requires a greater degree of judgement than is required for the valuation of the other current assets. The acid-test ratio represents an even sterner test of an enterprises liquidity than does the current ratio. Quick ratio is a more penetrating test of liquidity than the current ratio. It shows the availability of cash and near cash items against current obligations. Traditionally 1:1 quick ratio is taken as a satisfactory standard for the purpose.
Particulars Current Assets (Rs. Cr.) Current Liabilities (Rs. Cr) Current Ratio
2004-2005 435.00
2005-2006 386.27
2006-2007 379.76
106.88
64.60
64.84
4.06
5.97 347.31
5.85 350.39
Quick Assets 396.13 (Rs. Cr) Quick Ratio 3.70
5.37
5.40
Table 7: Liquidity Test of IPGCL
The quick ratios of IPGCL for the period under study are shown in table 7. The table shows that the quick ratio of IPGCL always remained higher than the standard norms of 1:1. The quick ratios are very high in 2006-07 when it is 5.40.
FINANCING OF WORKING CAPITAL

After determining the requirements of current assets in the aggregate and in various components of working capital, the next important task before a financial manager is to select an assortment of appropriate sources to finance current assets. A business firm has diverse sources to meet its financial requirements. In selecting a particular source, a financial manager has to consider the merits and demerits of each source in the context of the constraints of the firm. The need of working capital is increased by raising the prices of endproducts and relative inputs. On the other hand, the Government and monetary authorities play their own role to curb the malice in periods of inflation. Control measures often take the form of dear money policy and restrictive credit. Financing of additional working capital requirements in such an environment is a real problem for the finance manager of the unit. A study of working capital can be made from the point of view of its size, adequacy and the sources from which it is procured. It may also be worthwhile to study here how IPGCL could have strengthened their sources base of working capital.
Table 8 shows the position of working finance of IPGCL for the period of three years covered by the present study. The working capital ,though , positive for the entire period under study, does show a decreasing trend as is clear by the progressive trend column. There is a decrease of around 4 per cent in net working capital during the period under study. This
decreasing trend shows that in these years the size of business of IPGCL has a decline in growth. Particulars Working Finance (=Net Working Capital) (Rs. Cr) Progressive Trend of Working Finanace (%) 2004-2005 328.12 2005-2006 321.67 2006-2007 314.92
100
98.03
95.97
Table 8: Size of Working Finance at IPGCL

Profitability of IPGCL Apart from the creditors, both short-term and long-term, also interested in the financial soundness of a firm are the owners and management or the company itself. The management of the firm is naturally eager to measure its operating efficiency. Similarly, the owners invest their funds in the expectation of reasonable return. The operating efficiency of a firm and its ability to ensure adequate return to its shareholders depends ultimately on the profits earned by it. Profitability ratios can be determined on the basis of either sales or investments. The profitability ratios in relation to sales are: (a) Profit Margin(Gross and Net). (b) Expenses Ratio. Profitability in relation to investments is measured by: (a) Return on Assets. (b) Return on capital employed. Profitability of operations provides to a business enterprise the most dependable source of working finance. The profit position of a company can be studied from the following view points (here the figures for profit before tax are been taken):
1. Net profit to operating revenue ratio. Working Capital Management 38
2. Net profit to capital employed ratio. 3. Net profit ratio.
Particulars
2004-2005
2005-2006 0.14
2006-2007 0.26
Net Profit to 0.18 Operating Revenue Ratio Net Profit to 7.2 Capital Employed Ratio Net Profit Margin (Net Profit Ratio) 0.15
6.13
12.4
0.10
0.24
Table 9: Profitability Ratios of IPGCL Net Profit to Operating Revenue Ratio Table 9 shows that the net profit to operating revenue for IPGCL is equivalent to nil for 2004-05 and 2005-06 because of the fact that the company suffered losses during this period. The highest net profit to operating revenue ratio is 0.26 per cent in 2006-07. Net Profit to Capital Employed Ratio Table 9 shows that the Net Profit to Capital Employed Ratio for IPGCL is 7.2 & 6.13 for 2004-05 and 2005-06 because of the same reason as before- the company incurred a net loss during this period. The highest net profit to net worth ratio is 12.24 per cent in 2006-07.
Net Profit Margin A high net profit margin would ensure adequate return to the owners as well as enable a firm to withstand adverse economic conditions when selling price is declining, cost of production is rising and demand for the product is falling. In case of IPGCL there is a low profit margin of less than 0.25 and this has a opposite implications. However, IPGCL with a low profit margin, can earn a high rate of return on investments and it also has a higher inventory turnover ratio of 17.40 in 2006-2007.
CONCLUSION
The Financial Statistics of IPGCL for the year 2006-07 shows that IPGCL is able to earn a profit of Rs. 118.48 crores. The probable reasons for profit are as below: (1) Due to the Power demand in the Capital City is increasing with the growth of population as well as living standard and commercialization.
(2) Due to increase in the unrestricted power demand in the summer of year 2000 was
3000 MW and increasing every year @ 6 to 7%. In 2009-2010, it is expected to be 5075 MW.
(3) Besides, the management of IPGCL has taken several cost-cutting measures during
2006-07, which have started yielding result. (4) Delhi government has decided to shut down the vintage coal based plant till 2010 and that will contribute positively in the profit of the company. To sum up the study and considering all the aspects together i.e. inventory, cash, etc; it can be said that the company should try to reduce investments in inventories. It is also suggested that they should maintain proper cash balances. However, the position of IPGCL has been satisfactory. The management of IPGCL can put the company on sound footing with a more tight management of working capital. To conclude, it may be observed that although IPGCL has crossed the infancy period, it is yet to show sign of good financial management. However, IPGCL appears to be well managed.
40
BIBLIOGRAPHY
Management Accounting- M Y Khan & P K Jain.
Financial Management- Prasanna Chandra. Financial Management- I M Pandey. Corporate Finance- Brealey & Myers.
Corporate Finance Theory and Practice Ashwath Damodaran Management of Working Capital in Public Enterprises K.V.Rao
Annual Reports of IPGCL from the year 2004-2005 to 2006-2007.
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Indraprastha Power Generation Co. Ltd.

SUMMER INTERNSHIP REPORT

INDRAPRASTHA POWER GENERATION CO. LTD., NEW DELHI

Raja Kumar Choudhury 9971567809 MISSION

Indraprastha Power Generation Co. Ltd.(IPGCL)

To Whomsoever It May Concern